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Stender v. Archstone-Smith Operating Trust

United States District Court, D. Colorado

August 25, 2017

STEVEN A. STENDER, and INFINITY CLARK STREET OPERATING, L.L.C., on behalf of themselves and all others similarly situated, Plaintiffs,



         This is a class action certified as to liability only. (See ECF No. 434.) Plaintiffs Steven A. Stender (“Stender”) and Infinity Clark Street Operating, L.L.C. (“Infinity”), along with the other members of the Plaintiff Class (collectively, “Plaintiffs”), owned preferred equity interests in a real estate investment trust that underwent a complicated merger in 2007. Plaintiffs claim that the merger was structured to impermissibly eliminate their interests, causing them (collectively) about $1 billion in damages.

         Before the Court are four motions for summary judgment filed by the following groups of Defendants:

• the “Tishman Defendants” (Tishman Speyer Development Corporation (“Tishman”), along with the “River Entities, ” namely, River Holding, LP, River Acquisition (MD), LP, River Trust Acquisition (MD), LLC, and Archstone MultiFamily Series I Trust) (ECF No. 565);
• the “Individual Defendants” (Caroline Brower, Stephen R. Demeritt, Ernest A. Gerardi, Jr., Ruth Ann M. Gillis, Ned S. Holmes, Robert P. Kogod, Charles Mueller, Jr., Alfred G. Neely, James H. Polk, III, Mark Schumacher, John C. Schweitzer, R. Scot Sellers, and Robert H. Smith) (ECF No. 570);[1]
• the “2013 Defendants” (AvalonBay Communities, Inc., Equity Residential, and ERP Operating Limited Partnership) along with Archstone Enterprise LP, Archstone Inc., and Lehman Brothers Holdings Inc.-entities which, for some unexplained reason, do not fit within any larger group (ECF No. 571); and
• the “Archstone Defendants” (Archstone-Smith Trust and Archstone-Smith Operating Trust) (ECF No. 576 (public entry); ECF No. 572 (restricted entry)).

         These four motions are comprehensive-they address all remaining causes of action asserted against all Defendants.

         For the reasons explained below, the Court finds no genuine dispute of material fact that the terms of the 2007 merger were permissible, contrary to Plaintiffs' position. Accordingly, all four motions are granted and the Court directs entry of final judgment.


         Summary judgment is warranted under Federal Rule of Civil Procedure 56 “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-50 (1986). A fact is “material” if, under the relevant substantive law, it is essential to proper disposition of the claim. Wright v. Abbott Labs., Inc., 259 F.3d 1226, 1231-32 (10th Cir. 2001). An issue is “genuine” if the evidence is such that it might lead a reasonable trier of fact to return a verdict for the nonmoving party. Allen v. Muskogee, 119 F.3d 837, 839 (10th Cir. 1997).

         In analyzing a motion for summary judgment, a court must view the evidence and all reasonable inferences therefrom in the light most favorable to the nonmoving party. Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 670 (10th Cir. 1998) (citing Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)). In addition, the Court must resolve factual ambiguities against the moving party, thus favoring the right to a trial. See Houston v. Nat'l Gen. Ins. Co., 817 F.2d 83, 85 (10th Cir. 1987).

         II. FACTS

         The following facts are undisputed except where attributed to a party or otherwise noted.[2]

         A. REITs, UPREITs, and TPAs

         This case involves an investment vehicle known as real estate investment trust, more commonly known as a “REIT, ” and its sibling, an umbrella partnership real estate investment trust, or “UPREIT.” A traditional REIT owns and usually operates a portfolio of income-producing real property. (ECF No. 575 ¶ 1.) For various reasons, REITs are often seen as desirable investments, including because the Internal Revenue Code requires REITs to distribute at least 90% of their taxable income to shareholders each year. (Id. ¶ 2.)

         Some REITs actually take the form of two legally separate entities, a REIT and an UPREIT. First an UPREIT is formed, which is an entity taxed as a partnership for federal income tax purposes, and it owns and operates the income-producing properties. (Id. ¶ 4.) If legally formed as a trust under state law, the UPREIT is commonly known as an “OT, ” short for “operating trust.” (Id. ¶ 5.) Then a REIT is formed to invest exclusively in the operating trust's (i.e., the UPREIT's) partnership interests, usually known as “units.” (ECF No. 575-2 at 8.)[3] In such a structure, the REIT is sometimes known as the “parent REIT.” (Id.)

         The REIT-UPREIT structure tends to attract investment from individuals and entities that already own income-producing properties, particularly if the REIT organizes as a publicly traded corporation. An income-producing property owner can contribute properties to the UPREIT (the operating trust) in exchange for partnership units and, in most cases, the right to redeem those units for the parent REIT's publicly traded common stock, or for cash. Thus, the contributor diversifies his, her, or its real estate investments and gains the option of relatively easy liquidity. (Id. at 9.)

         Another attractive aspect of the REIT-UPREIT structure, from a contributor's perspective, is tax deferral:

If a property contributor were to sell appreciated real property for cash or exchange it for REIT stock, that transaction would be treated as an immediately taxable sale. On the other hand, the contribution of appreciated real property to an UPREIT for [partnership] units is tax-deferred under [the Internal Revenue Code], which means the contributor can defer recognition of any taxable gain on the property to a later date.


         However, a contributor loses managerial control over the contributed property. (Id. at 10.) Moreover, “[i]n virtually all cases, ” the various contributors form a minority class of unitholders “because the majority of the capital in the [operating trust] comes from public investors” and, consequently, “the majority of the [UPREIT's partnership] units are owned by the [parent] REIT.” (Id. at 8.) Given contributors' desire for tax deferral and their understanding that they no longer will control the disposition of their properties, contributors frequently bargain for “tax protection agreements, ” or “TPAs, ” that require the UPREIT to indemnify the contributor for the tax consequences of any decision to sell the contributor's property. (Id. at 10; see also ECF No. 592 ¶¶ 29-31.)

         B. Archstone, the Operating Trust, A-1 Units, and A-2 Units

         This case revolves around a particular REIT-UPREIT pair (both organized under Maryland law), namely: Defendant Archstone-Smith Trust, the publicly traded parent REIT (“Archstone”); and Archstone-Smith Operating Trust, the UPREIT that actually owned and managed the properties (“Operating Trust”). Plaintiffs were all contributors of property to the Operating Trust (either directly or through the merger of a previous UPREIT into the Operating Trust). (See ECF No. 575 ¶¶ 13-16, 18-22, 37, 39-42.)

         In exchange for their contributions, Plaintiffs received “A-1 units, ” representing their investment in the Operating Trust. (ECF No. 592 ¶ 26.) One or more TPAs were linked to this investment, thus preserving (for a specified amount of time) Plaintiffs' preference for tax deferral. (Id. ¶ 26.) A-1 units also carried with them other benefits. These included the right to redeem A-1 units for cash or Archstone common stock (ECF No. 575-46 at 56, § 6.6) and quarterly distributions of 100% of the Operating Trust's “Available Cash” (id. at 33, § 3.1).

         Archstone's investment was represented by “A-2 units.” (ECF No. 575 ¶¶ 53- 54.) At all times relevant to this lawsuit, Archstone owned a majority of all Operating Trust units. In the year 2007-the crucial year, as will shortly become clear- Archstone's A-2 units represented about 89% of all A-1 and A-2 units outstanding in the aggregate. (Id. ¶ 273.)

         C. The Possibility of a Go-Private Transaction

         In April 2007, Archstone was approached by two potential buyers interested in taking Archstone private. (Id. ¶ 119.) One of these suitors was a partnership between Defendant Tishman Speyer Development Corporation and Defendant Lehman Brothers Holdings Inc. (“Tishman-Lehman”). (Id.) The other suitor was Blackstone, a non-party to this litigation. (Id.)

         On April 30, 2007, Blackstone submitted a non-binding indication of interest to acquire Archstone and the Operating Trust for $62.50 per share and unit. (ECF No. 592 ¶ 227.) On May 2, 2007, Tishman-Lehman submitted a non-binding indication of interest to acquire Archstone and the Operating Trust for $64.00 per share and unit. (Id. ¶ 163.)

         D. Annex A and Hogan's Advice

         From the outset, Archstone and its suitors envisioned a transaction by which a new UPREIT formed by one of the suitors would merge into the Operating Trust, after which Archstone would itself merge into a new REIT. (See ECF No. 593-16 at 3, 5.) This contemplated structure required the parties to consult “Annex A” to the “Declaration of Trust”-the document that governed Archstone's, the Operating Trust's, and the A-1 unitholders' various rights and responsibilities with respect to each other. (See ECF No. 575-46.) Annex A's section 5.1A(3) empowered “the Trustee” (Archstone) to take various actions, including “the merger or other combination of the [Operating] Trust with or into another entity . . . subject to any prior approval only to the extent required by Section 5.3 hereof.” (Id. at 40.)

         Archstone hired the law firm of Hogan & Hartson (now Hogan Lovells) (“Hogan”) to advise it regarding the legal aspects of the potential transaction, including Annex A's approval requirements. (ECF No. 575 ¶ 122.) On May 8, 2007, Hogan sent a “Discussion Outline of Proposed Transaction Structure” to Archstone, explaining its preliminary analysis. (ECF No. 593-16.)[4] Under the heading “Corporate Consent Requirements; Appraisal Rights, ” the discussion outline advised that the merger of an outside entity into the Operating Trust required only a “[m]ajority vote of holders of Units of all classes entitled to vote (A-1 and A-2 units) as a single class.” (Id. at 6.) The discussion outline drew this requirement from Annex A's section 5.3B(ii), which reads in relevant part:

The Trustee may not, directly or indirectly, cause the [Operating] Trust to sell, exchange, transfer or otherwise dispose of all or substantially all of the Trust's assets in a single transaction or a series of related transactions (including by way of merger (including a triangular merger), or other combination with any other Persons) except as follows: . . . (ii) if such merger, sale or other transaction is in connection with a Termination Transaction permitted under Section [9.2B] hereof and is approved by the Unitholders holding at least a majority of the then outstanding Units entitled to vote thereon (including any Class A-2 Units held by the Trustee) . . . .

(ECF No. 575-46 at 44.) The cross-referenced section 9.2B reads, in relevant part:

The Parent REIT [i.e., Archstone] shall not engage in any merger (including a triangular merger), consolidation or other combination with or into another person . . . (“Termination Transaction”), unless . . . (iii) in connection with such termination transaction all [Operating Trust] Unitholders either will receive, or will have the right to elect to receive, for each Unit an amount of cash, securities, or other property equal to [the per-share consideration offered to Archstone's common shareholders] . . . .

(Id. at 63 (underscoring in original).) In other words, reading sections 5.3B(ii) and 9.2B(iii) together, Archstone could eliminate the Operating Trust by way of merger if (1) a majority of A-1 and A-2 unitholders voted in favor of it, (2) Archstone itself was undergoing a Termination Transaction, and (3) the Operating Trust unitholders received at least the option to cash out on the same terms as Archstone's shareholders.

         Hogan's May 8, 2007 outline also discussed matters on which a separate vote of only A-1 unitholders might be required. (ECF No. 593-16 at 4-6.) Hogan noted A-1 units' various benefits (such as preferred distributions) and stated that “[t]he better reading of [Annex A] is that an amendment to Annex A could not be effected as part of the merger vote, but would require compliance with the applicable amendment vote as well.” (ECF No. 593-16 at 4.) This is a reference to Annex A's sections 12.3 and 12.4. Section 12.3 states that various provisions of Annex A “may only be amended with the approval of the holders of at least a majority of the Class A-1 Units outstanding and entitled to vote thereon.” (ECF No. 575-46 at 73.) Among the provisions subject to this requirement is one regarding how to calculate distributions if the parent REIT is not publicly traded (the intended result of the proposed merger). (Id. (referring to § 3.1E).) Section 12.4 requires individual unitholder approval from any unitholder “adversely affected” by an “amendment” that would, among other things, “amend” provisions regarding the Trustee's powers, and calculation of distributions when the parent REIT is publicly traded. (Id.)

         The Archstone Defendants claim that Hogan's discussion of sections 12.3 and 12.4 was prompted solely by the then-assumed transaction terms, which did not turn out to be the final terms. (See ECF No. 604 ¶¶ 135-47.) The Archstone Defendants say that they originally foresaw a merger in which A-1 units would persist, as reflected on the Hogan outline's first page, which announces that “Class A-1 . . . Unitholders will be entitled to elect to receive one of the following forms of consideration: [1] Class A-1 unit[s] . . . [2] Cash equal to per share merger consideration . . . [or 3] Preferred Unit[s] [i.e., a new class of preferred security, explained later in the discussion outline].” (ECF No. 593-16 at 3; see also ECF 575 ¶ 168.) As discussed in more detail below (Part IV.A.5), Plaintiffs view Hogan's recitation of these three options and its discussion of sections 12.3 and 12.4 as at least implied attorney advice that any merger, under the circumstances, must preserve the A-1 units and call for the A-1 unitholders' vote to effect any relevant change to the benefits of an A-1 unit. Nonetheless, Hogan further opined that, although a suitor may want to have some of the A-1 unitholders' rights “amended, [the] closing of the merger should not be conditioned on a successful vote by the A-1 holders.” (ECF No. 593-16 at 5.)

         E. Due Diligence, Hogan's Continuing Advice, and the First Draft of the Merger Agreement

         On May 9, 2007, Blackstone and Tishman-Lehman commenced their due diligence. (ECF No. 592 ¶ 230.) One of the documents these parties received was a “Draft and Preliminary” spreadsheet from an Archstone internal tax professional estimating the total amount of liability Archstone or its successor might incur if it sold every property subject to a TPA. (Id. ¶ 221; ECF No. 593-26 at 3.) The estimate at that time was approximately $1.044 billion. (Id.)

         On May 14, 2007, Hogan sent to Archstone an updated discussion outline. (ECF No. 593-17.) This discussion outline continued to reflect a transaction in which A-1 unitholders would receive three options: keep their A-1 units, exchange them for cash, or exchange them for a new preferred unit. (Id. at 3.) Those choosing to retain their A-1 units would do so “subject to any amendments that are made with a vote of unitholder; many of the essential economic rights of Class A-1 Units cannot be changed without the approval of each affected holder.” (Id.) Nonetheless, Hogan continued to advise that “[t]here would not be a separate vote of Class A-1 Unitholders to approve the Operating Trust Merger, which can be approved by a vote of all common unitholders, including [Archstone], voting as a single class.” (Id. at 4.)

         On May 15, 2007, Archstone made available to Blackstone and Tishman-Lehman a draft merger agreement. (ECF No. 575 ¶ 196.) This draft proposed that A-1 unitholders receive the three choices reflected in the Hogan discussion outlines. (Id. ¶ 197.) According to Plaintiffs, giving A-1 unitholders the right to elect to cash out was desirable from Archstone's and the suitors' perspectives because the other option available under section 9.2B(iii) of Annex A-a forced buyout-would have triggered the various TPAs. (ECF No. 592 ¶¶ 13-14.) As noted, Archstone estimated at the time that the liability under the TPAs would have been $1.044 billion.

         The May 15 draft also proposed the same merger structure that had been presumed since the beginning of discussions, namely, that an entity created by the buyer would merge into the Operating Trust, after which Archstone would merge into another entity created by the buyer. (ECF No. 593-18 § 2.01.) The first step in this process-a new entity merging into the Operating Trust-was again desirable from a tax standpoint, because it would prevent characterizing the merger as a sale of the Operating Trust's assets, thus avoiding the TPAs. (ECF No. 593-102 at 32-33.)

         Also on May 15, 2007, Archstone's board of directors (“Board”) received a report from its financial advisor for the proposed transaction, Morgan Stanley, that Blackstone might not be able to “get comfortable with” various aspects of the proposed deal, including “the amount of built-in gain that is tax protected” (ECF No. 593-6 at 3)- apparently referring to the $1.044 billion estimate.

         On May 17, 2007, Defendant Brower (Archstone's general counsel) e-mailed Hogan and stated, among other things, that Blackstone representatives informed her “it's ‘pencils down' if they have to have the A-1 Units in the deal - it sucks out too much of their upside.” (ECF No. 593-43 at 2.)[5] May 17 also saw the circulation of a third discussion outline from Hogan. (ECF No. 593-20.) The May 17 outline is materially identical to the May 14 outline.

         F. Continuing Worries About Tax Protection Consequences

         On May 19, 2007, Blackstone informed an Archstone representative that it would not be submitting a formal bid. (ECF No. 604 ¶ 235.) A Morgan Stanley representative informed the full Archstone Board of this development at a special meeting held on May 21, 2007. (ECF No. 593-8 at 2.) According to Morgan Stanley, Blackstone “attributed this decision primarily to various costs associated with the [Operating Trust's] tax protection obligations and increases in real estate taxes due to reassessments that it and its advisors had evaluated during their diligence.” (Id.)

         Morgan Stanley further informed the Board that Tishman-Lehman “was also facing some challenges due to the higher than expected costs associated with the [Operating Trust's] tax protection obligations and the impact of such costs on their ability to sell certain of the assets.” (Id.) Tishman-Lehman still planned to submit a bid, but for “less than the originally indicated price of $64.00 per share.” (Id.) The Board then had an “extensive discussion” about the tax protection obligations “and possible ways to increase the purchase price that [Tishman-Lehman] could be willing to pay based on the number of unitholders of the [Operating Trust] that elect to receive cash in the Transaction, thereby potentially reducing the overall tax protection-related costs for [Tishman-Lehman].” (Id. at 3.) Morgan Stanley and Hogan were directed “to further analyze whether such [a] mechanism would be feasible.” (Id.)

         The next day, Hogan informed Morgan Stanley that it had “developed a method through which the cash price paid per share in a merger could be increased to reflect any potential savings that a bidder may realize in future tax protection payments if a greater percentage of Class A-1 units elect cash.” (ECF No. 593-15 at 5.) Plaintiffs claim that on or about this same day, Morgan Stanley forwarded this proposal to Tishman-Lehman, which rejected it along with any notion that there would be “tax protection sharing.” (ECF No. 592 ¶ 242.)

         G. Final Negotiations, the Merger Agreement, and the Advent of Series O Units

         Sometime on May 21, 22, or 23, 2007, Tishman-Lehman “informed Archstone that the option of retaining A-1 Units was a ‘dealbreaker' and that [it] would not purchase a company in which [it] did not own all the equity.” (ECF No. 575 ¶ 222.) On May 22, 2007, Tishman-Lehman sent back a marked up version of the proposed merger agreement. (ECF No. 593-23 at 3.) Then, on May 23, 2007, Tishman-Lehman submitted a formal bid of $60.00 per share. (ECF No. 575 ¶ 223.)

         The Board held a special meeting later that same day to discuss the bid. (Id. ¶ 226.) In advance of this meeting, the Board received Hogan's summary of Tishman-Lehman's marked up draft. (ECF No. 593-24.) Hogan noted that Tishman-Lehman's “proposal provides only two choices for A-1 unitholders: cash or newly issued preferred units. . . . [Tishman-Lehman] has not yet submitted a proposal regarding the terms of the new preferred units.” (Id. at 4.) Hogan also noted that Tishman-Lehman proposed some amendments to the Declaration of Trust but it was “unclear from their mark-up what they intend to amend and the basis for concluding that such amendment will not require a separate vote of the Class A-1 unitholders.” (Id. at 5.)

         At the Board meeting itself, Morgan Stanley explained that Tishman-Lehman's offer of $60.00 per share (down from its initial indication of interest at $64.00) was motivated by the “previously stated reasons of higher than expected tax protection costs, rising cost of debt financings, lower than expected value of the development pipeline and other unfavorable market conditions.” (ECF No. 575-122 at 3.) The Board instructed Morgan Stanley to make a counter offer of $62.00 per share, along with “a mechanism for increasing the consideration based on the election of the unitholders [whether to cash out or not]” and a demand that the new preferred unit be offered on “market terms.” (Id. at 3-4; see also ECF No. 575-123 at 2.)

         The Board met again on May 24, 2007-twice, in fact. (ECF No. 575 ¶ 231.) At the first meeting, the Board heard from Morgan Stanley that Tishman-Lehman had considered the counteroffer and had raised its bid to $61.00 per share. (ECF No. 575-123 at 2.) However, Tishman-Lehman “would not consider [Archstone's] proposed mechanism for increasing the merger consideration based on the results of the unitholder election.” (Id.) In addition, Tishman-Lehman had not yet fully worked out the terms of the new preferred units, but expected that they would have a preferential distribution rate of 6% per annum. (Id. at 3.) Morgan Stanley “expressed its views that the 6% coupon rate being proposed was within the range of market rates in light of the likely capital structure and leverage of the [Operating Trust] post-closing.” (Id.) After discussion of other matters related to the proposal, the Board went into executive session and authorized Morgan Stanley to accept the offer of $61.00 per share subject to, among other things, “receipt of a final term sheet for the preferred units that reflected market terms.” (Id. at 4.)

         The Board convened again that evening to hear a report from Morgan Stanley regarding its discussion with Tishman-Lehman about Archstone accepting the $61.00 offer. (ECF No. 575-124 at 2.) Morgan Stanley stated that Tishman-Lehman's $61.00 offer was conditioned on the Operating Trust not paying its announced second-quarter dividend. (Id.) This prompted the Board to discuss $60.75 per share “as a compromise to split the difference.” (Id. at 3.) The Board authorized Morgan Stanley to convey the $60.75 proposal subject to, among other things, “satisfactory terms of the preferred units” and withdrawal of the demand to withhold the second-quarter dividend. (Id.)

         By the evening of Friday, May 25, 2007, Archstone and Tishman-Lehman had “a handshake at $60.75.” (ECF No. 575-126 at 2.) The following Monday (May 28, 2007), the Board learned of the merger's near-final structure. As had been proposed from the beginning of discussions, a Tishman-Lehman entity would merge into the Operating Trust, after which Archstone would merge into another Tishman-Lehman entity. (ECF No. 575-127 at 3.) Archstone's common shareholders would be bought out at $60.75 per share. (Id.) The Operating Trust's A-1 unitholders would “be offered the opportunity to (a) exchange ...

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